From the investor's perspective high up in the stands, this "spectacle" is the "healthiest" thing that's happened in the 80-year history of mutual funds.

You heard me: The winner of this war between New York State Attorney General and the SEC is America's 95 million investors. The SEC has failed in its duties, and it deserves a swift kick in the butt, if not a knockdown punch.

Spitzer is right: "This has been an outrageous betrayal of the public trust. The regulators who were supposed to have been watching this industry were asleep at the wheel."

So please, let's hope this spectacular battle between Spitzer and Donaldson will go on and on with punches flying left and right for a long, long time.

Spitzer is doing something that not only Congress, the White House and the SEC failed to do, but something our great champions Jack Bogle and former SEC chairman Arthur Levitt hadn't been able to accomplish ... true reform of an out-of-control mutual fund industry.

Until the latest scandals, our champions haven't been able to push through any serious reform because America's highly paid fund managers are big political donors armed with a well-funded lobby that was able to manipulate Congress and the SEC into protecting the funds right to secretly siphon off excessive fees and commissions from investors without having to disclose their crooked behavior.

Spitzer takes off gloves, gets personal

So it's no wonder Donaldson's fighting mad. He hates the fact that the SEC's hypocrisy has finally been exposed for what it is, protection of fund managers at the expense of investors. The SEC had long ago stopped representing the little investor and turned pro-management. Spitzer's latest actions exposed not only the funds bad behavior, but also the SEC's, because now the SEC looks as guilty as the funds in the scandal lineup.

More specifically, Donaldson is fuming because Spitzer took off the gloves for a bare-knuckles fight. Last week, the day after Spitzer added the highly regarded chairman of Strong Funds to the list of bad guys engaging in illegal trading, Spitzer publicly humiliated Paul Roye, director of the SEC's investment management division:

"If I had been the head of the bureau overseeing the mutual fund industry for the past year, I would have resigned."

Kapow! A jab straight to the jaw. A knockout punch. What a fight! This is better than watching Muhammad Ali in the ring with Joe Frazier!

Did Roye deserve a public dressing-down?

After checking statements Roye made this past year, it looks like he deserved it. Back in May, Roye publicly announced his intent to favor industry self-policing: "I don't want to see the SEC over-regulating in ways that are detrimental to the investment management industry," Roye said to the Investment Company Institute (ICI).

Unfortunately, that comment makes Roye look more like a fund industry lobbyist than a federal regulator. Self-policing is a joke, as we've already seen at the NYSE.

Moreover, in a 119-page SEC study submitted to Congress in June, Roye openly contradicted most of what Bogle, Levitt and others have been saying for a long time about outrageously high and endlessly rising expense ratios and the hidden trading costs that would double the expense ratios of actively-managed funds if the SEC required full disclosure.

Roye simply brushed aside the evidence with this sweeping conclusion: "It is not clear that the overall costs of owning mutual fund shares has risen." And while acknowledging that transaction costs do reduce investor returns, Roye also brushed those facts aside and said the SEC would not require disclosure. Of course that was great news to the fund managers who want to keep transaction costs hidden from their own investors.

So after reviewing the SEC's miserable reform and oversight record this past year, we can conclude that Spitzer choose his words well in regards to Roye. Roye is the SEC's man for industry oversight, but he has been acting like a pawn in the hands of the high-paid fund mangers and their well-funded lobbyists. So yes, he deserved Spitzer's criticism and he ought to resign.

Maybe Donaldson should resign too?

Ah, now there's the big question in this fight: Should Donaldson also resign? After all, he's the boss setting the SEC's agenda. But Donaldson may be the lesser of evils, the devil we know. After all, if Donaldson left we might get another loser like his predecessor, Harvey Pitt. Besides, Donaldson has been so humiliated that he'll be forced to do something about reform to redeem himself.

We also know we can't count on Congress. Those political hacks are even worse than the SEC as defenders of the little investor. I fear we'll get a big show like we did earlier with Sarbanes-Oxley, but the industry's crafty lobbyists will work hard to make sure Congress avoids the same issues that never got passed this past summer. See past column.

The Donaldson-Spitzer is not news. Back in July after Spitzer's $1.4 billion settlement against Wall Street, Congress and Donaldson were conspiring on a new bill to limit (yes, limit!) the enforcement powers of state attorneys general (like Spitzer) against wrongdoers in the financial industry.

Then in early September, when Spitzer filed charges against four fund families for late trading and market timing, Donaldson immediately started whining about how "very dangerous" it was that Spitzer left the SEC out of the loop.

The truth is, Congress, the SEC and Donaldson absolutely hate effective enforcement by aggressive state agencies. The state AG's are doing the SEC's job. That's very embarrassing. And it makes them fighting mad ... but wait, that's good for investors.

So when the big scandals exploded, we suddenly had a good old-fashioned bare-knuckled brutal fight out in an open-air arena. And that folks, is worth cheering about.

How about it folks? Tell us what you think: Should Spitzer keep on fighting the SEC for you? Or is Spitzer being too hard on Donaldson, Roye and the SEC?

Paul
B. Farrell

Paul B. Farrell is a MarketWatch columnist based in San Luis Obispo, Calif. Follow him on Twitter @MKTWFarrell.

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